Below, you’ll find my personal CFA level 3 global investment performance standards (GIPS) notes…
You can find a list of the other categories here: CFA Level 3 Notes, Formulas, and Weights.
Compliance with GIPS standards may only be claimed by investment management firms (not to individuals). GIPS requires that all of the firm’s fee-paying discretionary portfolios are assigned to at least one composite. Non fee-paying discretionary portfolios can also be included but need to be disclosed.
The firms claiming compliance must be a Distinct Business Entity. For example, a separate legal entity, distinct client/market type, or separate and distinct investment process.
It’s recommended that GIPS firms are verified. And GIPS standards recommend defining a firm as broadly as possible to reduce confusion. Compliant firms should also provide existing clients annual GIPS-compliant performance presentations (for portfolios in which a client is invested).
Historical composite results should not be altered even with organizational changes, etc. The only permitted changes come from correcting errors.
If other non-GIPS compliant firms are marketed with a compliant firm, the distinction must be made clear.
When GIPS standards conflict with laws or regulations, the firms must comply with the local requirements but disclose the conflict in performance presentations.
GIPS standards require firms to show minimum investment performance of five years… or since the composite/firm inception. Then firms must add an additional five years of performance (10-years reported minimum). Firms may link non-compliant returns but must disclose them.
Effective date for the 2010 GIPS standards is the start of 2011.
Disclosure: Firms are not required to make negative assurance statements. For example, if a firm doesn’t use leverage, it doesn’t need to disclose that.
No exceptions to the GIPS standards are permitted. And firms can’t pick and choose which of their clients to present GIPS compliance presentations to.
GIPS Input Data
Compliant portfolio (2011 and after) must be measured at fair value (not cost or book value). And fair value supersedes market value. Fair value includes earned income.
Trade Date Accounting is required for firms beginning in 2005. The transaction must be reflected on the purchase/sale date. Don’t use settlement-date since there can be significant lags that push the transaction to the next reporting period.
Accrual Accounting is required for fixed-income and interest income securities. Interest must be recorded when it is earned vs when it’s received. Dividends should be recorded on the ex-dividend date.
Portfolio Valuation Timing Requirements
Before 2001: At Least Quarterly
Beginning 2001: At Least Monthly
Beginning 2010: On the Date of Large Cash Flows (“large” determined by firm) and On Each Calendar Month-End (or ending month business day)
Portfolios must not be valued opportunistically (no cherry picking). Must stick to the set valuation timing requirements.
Beginning 2006, firms must also stick to consistent beginning and ending annual valuation dates (calendar or fiscal year).
Firms must not switch valuation sources to improve performance.
GIPS requires the use of Time-Weighted Returns to minimize the impact of external cashflows.
Before 2005 use Original Dietz Method…
This method assumes all cashflows occur at the measurement midpoint.
Beginning 2005 use Modified Dietz Method…
w = proportion of days the Cash Flow has been included
Cash returns must be included in portfolio performance. Cash allocation has greater effect on portfolio returns than selecting short-term investments.
Actual trading expenses must be deducted in return performance. And Custody Fees shouldn’t be factored in as trading expenses even when charged on a per-transaction basis. If fees are bundled, the entire bundled fee should be deducted from returns. Estimated trading expenses are not permitted.
GIPS Constructing Composites
If restrictions prevent an investment strategy from being implemented as intended, it may render the portfolio non-discretionary. Large external cash-flows can also render a portfolio non-discretionary.
Composites can’t include modeled and back-tested portfolios. Although, they can be shown as supplemental info without linking to the actual returns.
Terminated portfolio should omit returns the month when terminated. For example, if trading stopped on April 20, performance reported should be through end of March.
Minimum asset levels can be change going forward if disclosed… but not retroactively.
Beginning 2010, Carve-Outs can’t be used in composites unless managed separately with its own cash balance. If a Carve-Out is included before 2010, it must be disclosed along with cash allocation policy.
GIPS Disclosure Requirements
- Exact GIPS compliance statements… one with verified statement or one without verified statement
- Definition of the Firm that’s claiming compliance
- Significant events that impact client
- Ex. If an important investment manager has left the firm
- Beginning 2006, must disclose when subadvisors are used
- Composite description (detailed description)
- Availability of all of the firm’s composite descriptions
- Composite creation date
- Minimum asset level
- Before 2010, Carve Out info
- Definition of significant asset level if set by firm
- Valuation policies and currency used
- Benchmark descriptions
- Internal dispersion measurement
- Beginning 2011, firms must disclose each annual
period end, three-year annualized standard deviation for both composite and
- If standard deviation determined not useful (non-normal distribution), the firm can use a different method but same timeframe
- Beginning 2011, firms must disclose each annual period end, three-year annualized standard deviation for both composite and benchmark
- Fees and fee schedule
- Number of portfolios (list unless 5 or fewer)
- Composite and firm assets (AUM)
Gross-of-Fees Return is reduced by trading expenses. Net-of-Fees Return is gross reduced by management fees.
Real Estate GIPS Provisions
External valuations must be from independent professionally designated, certified, or licensed commercial property value appraiser.
The 2010 GIPS require closed end funds to report Since Inception Internal Rates of Return (SI-IRR) that use a minimum of quarterly cashflows.
Must disclose Vintage Year to help potential clients compare different composites. Vintage year is defined by the year of the first drawdown or investor capital call… and the year when the first committed capital is closed and legally binding.
Final Liquidation date must be disclosed for liquidated composites.
Committed Capital is the pledged to the investment vehicle.
Paid-in-Capital since inception is amount of committed capital that has been drawn down.
Disclose since inception Distributions.
Required Real Estate Ratio Disclosure
Total Value to Paid-in Capital (TVPI) is also called Investment Multiple.
Total Value is the sum of since inception distributions and end-of-period residual value.
Distributions to Paid-in Capital (DPC) is also called the Realization Multiple.
Paid-in-Capital to Committed Capital (PIC)
Residual Value to Paid-in Capital (RVPI) is also called the Unrealized Multiple.
Please comment below if you have any suggestions or questions. Also, this is the last category in my CFA level 3 study list. If you’ve made it this far, take a break and check out three powerful trends in our economy. They’re leading to one inevitable outcome: Universal Basic Income.